Economic Scene; Minimum Wage: A Reality Test

By Peter Passell

Published: March 15, 1989

IS there more symbol than substance to the continuing controversy over the minimum wage?

Democrats with strong ties to the labor movement still work up a froth over Washington's failure to raise the $3.35 minimum hourly wage for eight long years. And lobbyists from service industries still talk darkly about the catastrophic cost of the $1.30 increase that has been approved by House and Senate committees.

But new evidence suggests that the effect of the proposed increase on employment and poverty would, in fact, be very modest. That reality is beginning to penetrate the political debate, clearing the way for a compromise in which conservatives accept a hefty increase in the minimum in return for a lower ''training wage'' for teen-agers.

Free market economists dislike minimum wages, and always will. In competitive markets, they argue, the demand for labor is determined by labor productivity, while the supply turns on the price that workers place on their own time. Thus any legal minimum above the ''market-clearing'' wage is sure to create unemployment and reduce total output, hurting some of the people the minimum wage is supposed to help.

Why, then, have many labor market analysts -notably the University of Michigan's Charles Brown - lost their taste for the battle? Partly because employment has grown less responsive to changes in the minimum. Partly because they understand that the linkage between the minimum wage and poverty is very weak.

In 1981, the $3.35 minimum represented 46 percent of the average wage. That same year, the Government's Minimum Wage Study Commission estimated that a 10 percent increase in the minimum would reduce job opportunities for marginally employable teen-agers by 1 to 3 percent. But by 1987 inflation had reduced the minimum to just 37 percent of the average wage. Alison Wellington, a University of Michigan researcher who updated the commission's findings, estimates that a 10 percent increase would now reduce teen employment by just six-tenths of 1 percent.

According to Robert Greenstein, the director of the Center for Budget and Policy Priorities, that downward revision in the estimated elasticity of employment has a dramatic effect on the potential impact of the Democrats' proposed 39 percent increase in the minimum wage. Instead of wiping out 650,000 jobs, as the Labor Department estimates, the loss would be fewer than 100,000.

That's still a lot of jobs. Shouldn't Congress worry about consigning 100,000 willing breadwinners to lives of poverty? Most minimum wage workers do not come from poor families. (The majority are second or third earners in middle-income households - spouses helping to meet the payments on a new car, teen-agers with after-school jobs.) And most poor families do not depend on minimum wage jobs for much of their income.

Moreover, minimum wage workers who are poor typically move in and out of the labor force, in effect sharing a large pool of low-wage jobs. Reduced demand for labor thus limits their opportunities for work and stretches average intervals of unemployment, but doesn't shut anyone out of the job market entirely.

This argument cuts both ways. The destruction of low-wage jobs might not push many Americans into poverty. But by the same token, an increase in the minimum wage would not pull many out. A computer simulation by two economists, William Johnson and Edgar Browning, showed that a hypothetical 22 percent increase in the minimum would increase the incomes of the one-fifth of Americans at the bottom of the income scale by just 1 percent.

For Mr. Brown, a veteran of the minimum wage wars, the weight of the evidence suggests there is little left to fight about. But symbols can matter, too. And while a higher minimum might not put much meat on the table, it would reinforce the social principle that work is the key to independence and self-respect.

Moreover, the eagerness of liberals to win one for labor has created an opportunity for conservatives to assert another principle: priority access to entry-level jobs for young workers.

The two-tier minimum proposed by President Bush, one that maintains a $3.35 ''training wage'' for inexperienced workers even as the regular minimum rises to $4.25, probably wouldn't have much impact because the higher tier wage wouldn't price many workers out of the market. But once in the law, the two-tier structure would be hard to get out. And if future Congresses did raise the minimum to levels that cut into total employment, teen-age workers would be protected.

Neither of the bills reported from Congressional committees contains a provision for a two-tier minimum. However, Augustus Hawkins, House architect of the Democrats' bill, is reportedly prepared to accept such a provision in order to build a veto-proof coalition for some increase in the minimum. The battle, long stylized as one of jobs versus incomes, is over. What has yet to be decided is how far the Democrats will go to save face.